In the stock market, the defense sector consists of stocks of companies that are involved in the provision of products or services to support the activities of the military department of a government.
Most companies in the defense industry rely on government contracts as their means for getting revenues. So, they usually do not perform well when governments are implementing expense reduction measures in their military budgets.
However, in times of war when governments spend more, the defense sector stocks offer lucrative gains to investors.
Traditionally, defense sector stocks have been viewed as good places for people to seek safety and protect their portfolios from complete run-down. In times of intense economic fears, investors usually resort to stocks of the defense industry because they have more steady revenue streams as compared to other sectors.
If you invest in the stocks of companies engaged in providing products and services to the military, you will have made a smart move. The stocks of these companies have unique qualities that investors cannot obtain from other places.
Here are some key characteristics of defense stocks and how they can be profitable to your portfolio.
The performance of most companies usually fluctuates depending on the prevailing market conditions and business cycle. Some companies record good performance when the cycle starts and some later. Generally, when the economy is thriving, the stock market records good performance, and when the economy is performing dismally, it records poor growth.
However, stocks of companies in the defense industry do not follow this pattern. The things that make the other sectors of the economy to perform poorly are normally the ones that fuel increased performance of the defense industry. This is why the defense sector stocks did better than the others during the bleak economy of the previous decade.
Right now, when the West start a military intervention against the draconian Islamic State of Iraq and Syria (ISIS), oil prices will rise and other developmental challenges will arise that will depress the stocks of the majority of commercial companies. But not defense sector stocks.
When war is imminent, the demand for products and services used by the military often increases. Therefore, when other stocks are plummeting, defense shares flourish.
High degree of resiliency
In other sectors of the economy, investors are usually worried about the occurrence of unfortunate events such as product recalls or trading losses.
The commercial marketplace is dynamic in nature and anything can happen – either beneficial or detrimental. However, this is less true of the defense industry.
Furthermore, governments are usually insensitive to price changes and they will often offer assistance when the sector is headed into an extended downturn.
As such, the defense industry is shielded from extreme market forces in a manner that very few other industries can dream of attaining.
Therefore, if you are a shrewd investor, defense sector stocks ought to be your cup of coffee. It is a sector that is worth keeping an eye on!